There’s a new bull market… in volatility


Traders signal offers in the S&P options pit at the Cboe Global Markets exchange on February 6, 2018 in ChicagoScott Olson

With the Dow Jones Industrial Average suffering its second 1,000 point loss this week on Thursday, pundits will again be eager to tell investors that the warning signs were clear long ago. But it’s easy to say the recent bout of market volatility shouldn’t have come as a surprise, and far more difficult to predict when and why the stock market will turn.

What we do know is that the lack of volatility has been a consistent theme for the past several years, and 2017 saw extremely low readings in virtually every asset class. The S&P 500 hadn’t seen a five per cent correction in more than 400 days, and the index closed down one per cent or more just four times in 2017, compared to an annual average of 30 days since 1980.

But with the VIX (which measures volatility implied by S&P 500 index options) having doubled to levels not seen since 2011, investors are finally out of their comfort zone. As a result, it seems pretty obvious that regime change is coming, whether it emerges in a chaotic fashion as it has in the past week, or a calmer, more easy-to-digest manner.

Either way, investors need to be prepared.

“A new bull market has emerged… and it’s in volatility,” said David Rosenberg, chief strategist and economist at Gluskin Sheff + Associates.